12.

Taxation

The Company and its subsidiaries file tax returns separately.

1) Value added tax ("VAT")

Pursuant to the Provisional Regulation of the P.R.C. on VAT and the related implementing rules, all entities and individuals ("taxpayers") that are engaged in the sale of products in the P.R.C. are generally required to pay VAT at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of or all the refund of VAT that it has already paid or incurred. The Company's P.R.C. subsidiaries are subject to VAT at 17% of their revenues.

2) Income tax

United States

Highpower was incorporated in Delaware and is subject to U.S. federal income tax with a system of graduated tax rates ranging from 15% to 35%. As Highpower does not conduct any business in the U.S. or Delaware, it is not subject to U.S. and Delaware state corporate income tax. No deferred U.S. taxes are recorded since all accumulated profits in the P.R.C. will be permanently reinvested in the P.R.C.

Hong Kong

HKHTC incorporated in Hong Kong, is subject to a corporate income tax rate of 16.5%.

P.R.C.

In accordance with the relevant tax laws and regulations of the P.R.C., a company registered in the P.R.C. is subject to income taxes within the P.R.C. at the applicable tax rate on the taxable income.

SZ Highpower has obtained the approval and is qualified as a New and High-Tech Enterprise ("NHTE") by the Shenzhen Tax Bureau, and according to the P.R.C. Enterprise Income Tax Law, it is eligible to enjoy a preferential tax rate of 15% for the calendar years of 2012 and 2011. All the other P.R.C. subsidiaries are not entitled to any tax holiday. They were subject to income tax at a rate of 25% for calendar years 2012 and 2011.

The components of the provision for income taxes are:

	Three months ended					Nine months ended
	September 30,					September 30,
	2012		2011			2012		2011
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
	$		$			$		$
Current		407,729		85,474			717,351		228,252
Deferred		119,218		(159,157	)		225,862		(159,157	)

Total		526,947		(73,683	)		943,213		69,095

The reconciliation of income taxes expenses computed at the statutory tax rate applicable to the Company is as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	$			$			$			$
Income (loss ) before tax		1,123,426			(704,193	)		1,996,074			(527,672	)

Provision for income taxes at applicable income tax rate		332,408			(68,175	)		566,510			(120,711	)
Effect of preferential tax rate		(128,418	)		(58,507	)		(301,863	)		(147,338	)
Non-deductible expenses		63,798			119,370			176,575			461,383
Change in valuation allowance		259,159			(66,371	)		501,991			(124,239	)

Effective enterprise income tax		526,947			(73,683	)		943,213			69,095

3) Deferred tax assets

Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of temporary difference.

	September 30,		December 31,
	2012		2011
	(Unaudited)
	$		$
Tax loss carry-forward		355,435		591,542
Allowance for doubtful receivables		6,270		85,400
Allowance for inventory obsolescence		107,868		134,248
Fair value change of currency forwards		70,930		(19,415	)
Difference for sales cut-off		91,598		65,434

		632,101		857,209